As Europe tries to save Iran deal, US sanctions push faces test

The new year could see 2016 nuclear agreement unravel if America turns the screw on European companies

After reimposing US sanctions on the Iranian economy, the Trump administration targeted people and entities tied to the regime. AFP

America's exit from the Iran nuclear deal in May was the culmination of President Donald Trump's long-declared antipathy towards the agreement. With all other parties to the accord standing by it, however, a different diplomatic battle is likely to unfold in 2019. This time, with the United States up against Europe.

After reimposing American sanctions on the Iranian economy, the Trump administration targeted people and entities tied to the regime. Moves are also afoot to curb Iran's ballistic missile programme and its military presence in Syria alongside Lebanese proxy Hezbollah.

At the United Nations, the US also cited the Revolutionary Guards' supply of missiles and weapons to Houthi rebels in Yemen as a major regional threat, urging action against Iran over ballistic missile tests.

Britain, France and Germany - the European powers in the Iran deal - have backed that US effort at the UN. But it is the nuclear agreement that is dominating policy.

Richard Nephew, an Iran specialist at the State Department during the George W. Bush era and the deputy principal negotiator for sanctions policy under President Barack Obama, said the split over the deal, an arms control agreement, now has potentially broader implications.

"The baseline metric of this disagreement is pretty significant. It is deleterious to the transatlantic relationship. Long term, strategically, this is all bad," Mr Nephew, author of The Art of Sanctions and now senior research scholar at the Centre on Global Energy Policy at Columbia University, said.

One of the biggest problems lies in gauging if the US sanctions will have the desired effect of reining in Iran's influence in the Middle East.

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So far, the Trump administration is happy with the reintroduced sanctions, though their primary effect has been to weaken the Iranian currency and economy rather than changing the regime's stance. Next year will see US sanctions policy face a bigger challenge because of the opposition of the other countries in the nuclear deal, Mr Nephew said.

“There are people in the White House who are pretty pleased with how it is going,” he said. “But sustaining that pressure and adding to it is harder. Past administrations applied pressure while having back channels to possible negotiations. The Trump administration is not doing that.”

The EU maintains that Iran should be allowed to gain economically from the nuclear deal, having agreed to limit its atomic programme in 2015 in return for a lifting of economic sanctions.

When it left the deal, the Trump administration insisted that European companies would not be allowed to do business with the US if they continued to trade with Iran. Russia and China, the other parties to the nuclear deal, have not been identified as targets in the same manner. The EU responded days later by issuing its own threat, saying European firms could be counter-sanctioned if they follow the US position.

The early weeks of 2019 will likely see the Europe-US standoff put to the test.

Europe is expected to announce the details of a clearing house – a financial instrument known as a special purpose vehicle – to allow companies doing business with Iranian firms to bypass the American sanctions.

Such a mechanism would offset Iranian exports to Europe against respective imports, effectively allowing firms to be paid in Iran or Europe without going through the international financial system.

Companies with large exposure to the American financial system – and thus possible censure – have already signalled that trade with Iran or using the special purpose vehicle is not a risk worth taking. French oil business Total, for example, stepped away from contracts it signed with Tehran after the nuclear deal.

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The European effort, including an expected joint hosting of the SPV between Britain, France and Germany, is intended to keep the nuclear deal separate from other matters relating to Iran. But risks remain, according to Ellie Geranmayeh, an Iran fellow at the European Council on Foreign Relations.

“The remaining countries are taking some action on both political and economic levels to persuade Iran that it is still worthwhile sticking to the agreement [rather] than leaving it,” she said.

“There is a growing sense that Europe, Russia and China hope to wait out the Trump term and prevent any major confrontation between the US and Iran.”

A heated UN Security Council meeting on December 12 illustrated the depth of the divide, with US Secretary of State Mike Pompeo acknowledging the differences. "They view it as the linchpin," he said of Europe, Russia and China on the nuclear deal. "I view it as a disaster."

In response, French ambassador Francois Delattre said the nuclear agreement's purpose of containment had been shown to work – Iran remains in compliance – in contrast to a sole US policy of sanctions and pressure that had not succeeded in the past. Russia and China made similar statements.

A possible compromise is the SPV being limited to a humanitarian channel, covering food, medicine and other essential goods that would not leave European or other non-US companies subject to American penalties. Mr Pompeo has suggested this may be possible. Such an agreement would limit any further strain between the US and Europe but the restricted benefits for Iran – it would not apply to the income from foreign oil sales for example – may ultimately persuade the regime to abandon the deal anyway.

“I think that is a reasonably likely outcome in 2019,” said Mr Nephew of Iran no longer choosing to fully comply with international inspections and monitoring of its nuclear facilities. “But I don't think they will do it overnight. Europe is talking a pretty tough game right now to keep them in.”